Using Your Retirement Plan in Your Wealth Strategy

Your wealth strategy and your retirement plan are one in the same. Don’t just hand your money to someone else to do what’s in your best interest for you and your family’s future. If it is up to be, it is up to you! -Joshua Gamen

——————————————————-

Using Your Retirement Plan in Your Wealth Strategy
One of the most popular questions I receive about a wealth strategy is this:I want to use the money in my retirement plan for a specific investment. Should I make the investment inside my retirement plan or should I distribute the money from my retirement plan and make the investment outside of my retirement plan?

My answer (of course) is it depends. It depends on your specific facts and circumstances.

Today, I’ll share some of the key factors to consider to help make this decision.

Factor #1: What Investment Options Are Available in Your Retirement Plan?
The term “retirement plan” covers a huge range of retirement plans – each of which has their own specific set of rules.You will first want to determine what your investment options are in your retirement plan. Some retirement plans, like an employer sponsored retirement plan, limit your investment options. Other retirement plans offer a broader range of investment options.

Factor #2: Are the Distributions Subject to Penalties?
While the rules vary by the specific type of retirement plan, in general, if money is distributed from a retirement plan early, meaning before the date allowed by the government and/or employer rules, then the distribution will most likely be subject to penalties.Penalties don’t rule out distributing the money, they just need to be factored in to your analysis.

Factor #3: Are the Distributions Subject to Income Tax
Depending on the type of retirement plan or when the distribution is taken, retirement plan distributions may be subject to income tax.Like penalties, just because the distributions may be taxed doesn’t rule out distributing the money – it just needs to be factored into your analysis.

Factor #4: What is Your Personal Situation?
Your personal situation plays a big role here. For example:– Is your tax bracket low or high?
– When can you take distributions from your retirement plan without penalty?
– What is your expected return on investment inside of your retirement plan?
– What is your expected return on investment outside of your retirement plan?
– What will you do with the investment long term?

Factor #5: What Type of Income Will Your Investment Produce?
Investments can produce different types of income including ordinary income, interest income, dividend income, rental income and capital gain. Some income types work very well inside a retirement plan, and others may cause your retirement plan to pay tax.
Factor #6: Does Your Investment Involve Leverage (Debt)?
If your investment involves debt, then this is a critical factor to understand.In some retirement plans, the tax implications of debt can be significant. For example, income generated from the debt can be taxable. Or, if you guarantee the debt personally, there could be tax consequences.

It’s important to not only understand the tax implication of using debt in your retirement plan, but also to understand how it can impact your investing. Many lenders are not willing to make a loan to a retirement plan without a personal guarantee. However, a personal guarantee, as noted above, could trigger tax. Lenders who are willing to lend to a retirement plan without a guarantee are usually not willing to lend as much as they would if there were a guarantee and the rate is usually higher.

It is extremely important to understand your leverage options inside and outside of your retirement plan before moving forward with your investment.

Factor #7: What Tax Benefits Will Your Investment Generate?
While retirement plans are often viewed as a great tax deferral vehicle, many tax benefits can be lost in retirement plans.For example, if a distribution is taxable from a retirement plan, it is generally taxable at ordinary income tax rates. This is true even if the income inside the retirement plan was capital gain income – which outside of a retirement plan has lower preferred tax rates. The tax benefit of the lower rate is lost.

Another example is investments that create losses for tax purposes. Some investments, like rental real estate or oil and gas, often create losses for tax purposes even though they generate positive cash flow. Losses inside a retirement plan are typically lost because the retirement plan usually doesn’t have any tax for the losses to offset.

Your Retirement Plan and Your Wealth Strategy
Your retirement plan can give your wealth strategy a tremendous boost. The key is understanding the best way to integrate your retirement plan into your overall wealth strategy.

Written by: Tom Wheelwright

Tom Wheelwright
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s